On December 26, 2013 the Office of Management and Budget (OMB), in conjunction with the Council on Financial Assistance Reform (COFAR), published policy changes in the Federal Register regarding federal agencies’ interactions with contractors and vendors on federal grants, contracts and cooperative agreements. The long-awaited OMB guidance titled, “Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards,” replaces rules in OMB Circulars A-21, A-50, A-87, A-102, A-89, A-110, A-122, and A-133.
The latest OMB guidance, which consolidates several OMB circulars to standardize and streamline applications and reporting, is designed to improve the delivery, management, coordination and accountability of federal awards, while reducing the administrative burden on non-federal entities that receive federal awards. The goal of these changes is to improve performance and outcomes by eliminating duplicative and conflicting guidance, while promoting stronger oversight and accountability for taxpayer dollars. The changes should also hopefully reduce waste, fraud and abuse in the process.
OMB changed the audit threshold for single audits by increasing the threshold from $500,000 to $750,000, essentially reducing costs for smaller awardees of federal contracts and grants. It is estimated that 5,000 small recipients of federal funding are expected to be relieved of their audit requirement with this threshold change. The Labor Department estimates that this move will save the federal government about $250 million each year in costs associated with the compliance and oversight of such awards.
Additionally, there are new thresholds in the determination of type A and B programs and lower minimum coverage rules pertaining to the percentage of federal awards expended that must be tested based on risk assessment, which may reduce the level of testing for some not-for-profit entities.
Apart from the audit-related changes, perhaps the most compelling changes involve direct and indirect costs.
Previously, federal agencies assigned certain administrative costs to the indirect cost pool rather than recognizing such program administration costs as direct costs. In some cases this led to confusion with not-for-profit entities, and in turn, led to either improper categorization of expenses or expenses that were not accounted for using the proper federally negotiated indirect cost rates. By better defining direct costs, and expanding the direct cost pool, more expenses associated with federal programs will now be more clearly allowable to not-for-profit entities. In the past, a by-product of this confusion was that certain not-for-profit entities ended up paying more for program delivery than necessary, as some of these costs were not reimbursed because they were either not captured or reported properly.
Under the new guidelines, non-federal entities now have two options when accounting for indirect costs. If they currently have a federally negotiated indirect cost rate agreement in place, that cost rate can be utilized. If not, a new 10% de minimus indirect cost rate is now available for non-federal entities indefinitely. This change affords not-for-profits the ability to utilize a rate of 10% of modified direct costs to be used on all federal awards. Additionally, a one-time extension of an existing federally negotiated indirect cost rate is allowable without further negotiation for up to four years.
The effective date for the new uniform guidance is December 26, 2014, which is exactly one year from the publication of the new guidance. The guidance will first impact single audits of not-for-profits with fiscal years beginning on or after December 26, 2014, meaning the first single audits affected by the new rules will be for those not-for-profits with December 31, 2015 year-ends.
The new guidance is the result of a two-year effort by the OMB, working in concert with the eight largest grant making federal agencies, state and local governments and other stakeholders. Federal agencies have six months from the publication in the Federal Register on December 26, 2013 to draft regulations to implement these changes. We will keep you updated as further developments occur related to the policy changes. If you have questions in the meantime about how the overhaul of federal awards policies and procedures will impact your organization, please feel free to contact us here.